Shyam Metallics and Energy Ltd IPO 6- Point Analysis

Introduction:

The company is amongst the largest producers of ferroalloys in terms of installed capacity in India, as of February 2021. It can sell intermediate and final products across the steel value chain.

As of March 31, 2020, they were one of the leading players in terms of pellet capacity and the fourth-largest player in the sponge iron industry in terms of sponge iron capacity in India. They also one of the leading integrated steel and ferroalloys producers in the eastern region of India in terms of long steel products, as of March 31, 2020 (Source: CRISIL Report).

Here is a 6 Point Analysis of the company:

1. IPO Details:

• With the Initial Public Offering, Company plans to raise Rs. 909 crores from the market. IPO consists of fresh issuance of shares worth Rs. 657 Cr. and offer for sale worth Rs. 252 crores.
• The Offer for Sale of Rs. 252 Crores aggregates the stake sale by the Promoters:
• Shubham Capital Pvt. Ltd. – 37 crores
• Shubham Build well Pvt. Ltd. – 63 crores
• Kalpataru Housefin and Trading – 25 crores
• Dorite Tracon – 30 crores
• Narantak Dealcom Ltd. – 97 crores
• The price Band of the IPO ranges between Rs. 303- Rs. 306. And the Face value is Rs. 10 per equity share.
• Shyam Metalics is listing on both BSE as well as NSE from June 14, 2021, to June 16, 2021.
• Lot Size of the IPO includes 45 shares in a single lot and multiples thereof up to 14 lots.
• The issue breakup of the IPO consists of the Total Issue, 50% is reserved for Qualified Institutional Buyers (QIB), 15% for Non-Institutional Investors (NII), 35% for Retail Investors, and employees Reservation of up to 30,000 equity shares.
• Objectives of the Issue are:
• For the repayment/pre-payment, in full or part, of debt of the Company and SSPL, one of the Subsidiaries- Rs. 470 Cr. of Shyam Metalics.
• General Corporate purposes- Rest of the Proceedings.
• The IPO will also bring change to the shareholding pattern of the company. Promoters’ shareholding in the company will decrease from 100% (Pre-Issue) to 88.35% (Post-Issue).

2.Shyam Metalics – Company Overview:

• The company was incorporated in 2002 as Shyam DRI Power Limited. In 2009, the company name was changed to Shyam Metalics and Energy Limited (SMEL)
• It is one of the leading metal-producing companies based in India with a focus on long steel products and ferroalloys.
• SMEL is amongst the largest producers of ferroalloys in terms of installed capacity in India, as of February 2021.
• As of March 31, 2020, the company is one of the leading players in terms of pellet capacity and the fourth-largest player in the sponge iron industry in terms of sponge iron capacity in India
• The company is having an international presence in the countries like Nepal, Bhutan, Bangladesh, China, Japan, and Dubai, and many others.
• The company is having 3 Manufacturing Facilities in India, 2 in Orissa, and 1 in West Bengal with an aggregate operating capacity of 5.70 million TPA with 227 MW of Captive Power Plant.
• Product Portfolio:
• The company is present across the steel sector’s value chain- pellets, sponge iron, billets, long steel (structural / TMT), pipe, Ferroalloys, railway siding, and captive power plant.
• Expanding product portfolio by new launches like Blast Furnace, Ductile Iron Pipes, Aluminum Foil.
• Ferroalloys are alloys of iron with a high proportion of one or more than one other element e.g.: chromium, manganese, or silicon and SMEL is amongst the largest producer of Ferro-alloys domestically with an annual installed capacity of 0.21 million ton as of February 2021, with 6.6% share in the capacity.

3. Industry Overview:

i) Growth Outlook:

1. India steel demand has increased at a CAGR of approximately 5.4% from Fiscal 2015 to Fiscal 2020.
2. Steel demand is expected to recover and continue its strong growth rate at 5.0% to 6.0% through Fiscal 2025.
3. Government initiative on affordable housing projects, infrastructure projects in metro, road, and infra space.
4. The government’s impetus on infrastructure is expected to drive double-digit steel demand growth in Fiscal 2022

ii) Steel- Production:

India is the second-largest producer of steel in the world with a nearly 6% share of global steel production.

iii) Steel- Demand:

India’s steel demand growth has outpaced the world’s average except for a brief period from 2010 to 2013.

iv) India Steel Sector Growth

1. India’s steel demand exhibited a swift comeback with a vigorous growth of 8% to 9% on-year in Fiscal 2018. However, Covid-19 Pandemic has greatly affected the various sectors of the country which has dampened the steel demand. But, not it seems to recover.
2. Soft revival in the housing sector in the medium term led by affordable housing, rural housing, and commercialization of tier III/IV cities. On the other hand, growth in the industrial segment is expected to remain muted;
3. Infrastructure projects in metro, road, and urban infra space (which are more steel-intensive);
4. The automotive industry has begun to recover post a drop in growth of 12% to 14% in Fiscal 2021 due to the COVID-19 outbreak.
5. Key Government Projects: Housing for All, National Capital Good Policy, Bharatmala Pariyojana, and Railways & Metros

4.Financials:

i) Revenue from Operations, EBITDA & EBITDA Margin:

• The revenue from operations of the company has grown at a CAGR of 6.56% and currently, during 9 months of FY21, it stands at Rs. 3842.6 Crores.
• The EBITDA of the company has also increased when compared to the previous year whereas the EBITDA Margin has also shown a rise in FY21.
• The company has strong financial performance and credit ratings with Revenue Growth: CAGR: 6.56% (2018-2020), positive EBITDA in each fiscal, Interest Coverage Ratio-highest among peers.

EBITDA Margin compared to peers, SMEL has relatively better financial strength as compared to other companies operating in long and intermediary steel space and reported healthy operational as well as financial growth despite downturns in the industry.          

ii) Profit before Tax and Net Profit:

• The Profit before Tax of the company for the last 3 years has shown a negative growth of -24.43% CAGR and it currently stands at Rs. 506.3 for 9 months in FY21.
• The Net Profit of the company for the last 3 years has also shown a negative growth of -19.72% CAGR and it currently stands at Rs. 456.3 for 9 months in FY21.
• Whereas, the Company enjoys tax benefit that leads to achieving greater profitability.

iii) Revenue Mix:

• TMT Structural products are the highest contributors in the current 9 months of FY21 with revenue of Rs. 1449.6 Cr.
• Iron pellets are second in the race with Rs. 845.7 Crores.
• Ferro alloys, Steel billets, and Sponge iron contribute to the revenue with Rs. 599.6 Cr., 541.8 Cr. and 440.3 Cr. respectively.

a) Revenue Mix – segment-wise:

• TMT Structural products contribute the highest 37% to the total revenue of the company.
• After TMT Structural products, Iron pellets contribute the highest to the revenue mix of the company with 22%.
• Ferroalloys, Steel billets, and Sponge iron also contributed to the revenue of Shyam Metalics. Their contribution to the revenue mix is 16%, 14%, and 11% respectively.

b) Revenue Mix – Geography-wise:

• Revenue of the company majorly derives from the business in India. Of the total revenue of the company, 89% of the revenue is generated from domestic markets.
• The exports contribute to 11% of the total revenue of the company.

iv) NPM & Interest Coverage Ratio:

• With improvement in operating margins, the net margins of SMEL have fared better than both sets in recent years. SMEL has reported the highest operating margins of 13.2% in Fiscal 2019 as against an average NPM of 6.7% of Set I and reported losses of Set II during the year.
• SMEL’s interest coverage has declined in the last 3 years but still is higher as compared to both peer sets throughout the last five years. SMELs interest coverage is one of the highest among its competitors.

vi) Borrowings:

• As of December 31, 2020, the company had total borrowings (consisting of long-term and short-term borrowings) of Rs. 886.2 Cr.
• This consists of long-term borrowings of Rs. 203.9 Cr. and short-term borrowings of Rs. 682.3 Cr.
• The Debt to equity ratio was 0.27 as of December 31, 2020.

5. Key Strengths  & Risk Factors:

i) Key Strengths:

• Integrated operations across the steel value chain- leading integrated metal producing company based in India and one of the leading integrated steel and ferroalloys producers in the eastern region of India in terms of long steel products, as of March 31.
• Shyam Metalics hasstrategically located manufacturing plants supported by robust infrastructure resulting in cost and time efficiencies.
• The company has a diversified product mix with a strong focus on value-added products, such as ferroalloys, association with reputed customers, and a robust distribution network.
• Domestic Customers include Jindal Stainless Limited, Jindal Stainless (Hisar) Limited, and Rimjhim Ispat Limited.
• International Customer includes Norecom DMCC, Norecom Limited, POSCO International Corporation, World Metals & Alloys (FZC), Traxys North America LLC, JM Global Resources Limited, Goenka Steels Private Limited, and Vijayshri Steel Private Limited.
• Shyam Metalics hasExperienced Promoters, Board, and senior management team.
• The company is introducing new products by leveraging forward integration capabilities.
• The company focuses on both backward & forward integration. For better Operational & Financial Performance.

(ii) Key Risks:

• The company is dependent on suppliers for meeting its demands for raw materials, and failure to which will harm their ability to manufacture products. Also, they don’t have any long-term contracts with them. In Fiscals 2018, 2019, and 2020, and the nine months ended December 31, 2020, the top three raw materials supplier accounted for 14.04%, 13.29%, 16.22 %, and 16.22 %, respectively.
• Shyam Metalics has High reliance on logistics and transportation infrastructure, as happened in March 2020- May 2020 due to Covid-19 Pandemic. The Indian Steel Industry went through a difficult phase during 1997-98, 2002-03, 2008-09, and 2014-15. An expected recovery in FY22.
• The company works in Steel Sector which is cyclical.
• There are outstanding criminal proceedings against the company, promoters, directors, subsidiaries, and group companies.
• Criminal Proceedings against Directors (17), Promoters (1), Subsidiaries (1).
• Chairman- Mahabir Prasad Agarwal, VC & MD- Brij Bhushan Agarwal, etc.
• If the company is unable to successfully implement proposed expansion plans, including the proposal to enter the ductile pipe and aluminum foil business, the results of operations and financial condition could be adversely affected.
• Manufacturing plants and sources of raw materials are primarily concentrated in eastern India and any adverse developments affecting this region could harm business as the company is having a total of 3 manufacturing plants in West Bengal and Orissa.
• Heavy Dependence on Top-10 Customers- Company is heavily dependent on top customers for revenue.

The inability to collect receivables from dealers on time or at all could adversely affect the working capital cycle and cash flow.

The company is having a high amount of Contingent Liabilities- Rs. 305 Cr. (Approx.)

6. Valuations:

• The Annualized EPS of the company stands at Rs. 26.04 and at Upper Side of Price Band is at Rs. 306
• The Price/ Book Value stands at 2.18x (9MFY21).
• The P/E ratio of the company stands at 11.7x. Whereas the P/E of Tata Steel, Steel Authority of India Limited (SAIL), JSW Steel, and Jindal Steel & Power stands at 17.92, 15.97, 21.57, and 7.85 respectively.
• The Expected Market Cap (Post Listing) is around Rs. 7,805 Crores. Whereas the market cap of Tata Steel, Steel Authority of India Limited (SAIL), JSW Steel, and Jindal Steel & Power stands at Rs. 1,34,205 Crores, Rs. 53,098 Crores, Rs. 1,70,632 Crores and Rs. 41,346 Crores respectively.

Conclusion:

As of now, the stock IPO is commanding a high grey market premium of Rs. 140-Rs. 150 per share. An Investor looking for trading gain can look out for this IPO, but for a longer horizon, there could be a risk as the company is involved in Cyclical Sector and hence and should only invest for longer-term if one knows the integrities of this industry cycle. Consult your financial advisor before making any investment decision.